Furthermore, happiness means being able to speak what’s on your mind without fear, to worship the God of your choosing, and to feel safe and secure in your own home.

Happiness means having opportunity–to get an education, to be an entrepreneur. What’s more satisfying than having a big idea and turning it into a thriving business, knowing all the way that the harder you work, the more reward you can expect?

With this in mind, five years ago researchers at the Legatum Institute, a London-based nonpartisan think tank, set out to rank the happiest countries in the world. But because “happy” carries too much of a touchy-feely connotation, they call it “prosperity.”

To build its index Legatum gathers data from 12 sources the Gallup polling group, the Heritage Foundation and the World Economic Forum. Each country is ranked on 89 variables sorted into eight subsections: economy, entrepreneurship, governance, education, health, safety, personal freedom and social capital.

The core conceit: Prosperity is complex; achieving it relies on a confluence of factors that build on each other in a virtuous circle.

“To use economic measurements alone to gauge the success of a nation would be equivalent to assessing the entire condition of a man simply by looking at his bank balance,” writes Peter Mandelson, former U.K. economic minister.

To that end, the inputs used to create the index are both objective and subjective: that’s because it’s not enough to know hard data like a country’s unemployment or inflation rates. It also matters how hard people think it is to find jobs, how convinced they are that hard work can bring success.

This can get complicated. In Nepal, for example, inflation is 11%, unemployment 46%. Yet a surprisingly high 50% of the people say they are satisfied with their standard of living and 81% have confidence in their banks. Could be they’re scared of voicing their true opinion in a shaky democracy, or maybe the Nepalese are just endemically happier people. Legatum adjusts for this, adding a variable called “ability to express political opinion without fear.”

What’s the most prosperous country in the world? Norway. What’s it got that the rest of the world doesn’t? The biggest bump comes from having the world’s highest per capita GDP of $53,000 a year. Norwegians have the second-highest level of satisfaction with their standards of living: 95% say they are satisfied with the freedom to choose the direction of their lives; an unparalleled 74% say other people can be trusted.

Cynics (particularly those leaving comments on Legatum’s excellent website) say Norway’s ranking is a fluke, that it’s a boring, godless (just 13% go to church) homogeneous place to live with a massive welfare state bankrolled by high taxes. Without massive offshore reserves of oil and gas that it exports to the world through state-controlled
Statoil
, Norway’s GDP would be far smaller.

And yet joining Norway in the top 10 prosperous countries are its Scandinavian sisters Denmark, Finland and Sweden, with equally small and civilized Switzerland and the Netherlands also in the club. None of these countries are blessed with great hoards of oil and gas.

So what gives? What do these prosperous European nations have in common that can somehow explain their prosperity? Being an electoral democracy is almost a given–of the top 25 most prosperous countries, only Singapore and Hong Kong aren’t.

Being small helps too. Big countries have so many disparate groups (ethnic, geographic, civic) vying against each other that it’s hard for true social cohesion and trust to emerge, and harder to maintain high levels of safety. Among countries with populations of more than 150 million, the United States ranks highest, at No. 10.

What else? They are all borderline socialist states, with generous welfare benefits and lots of redistribution of wealth. Yet they don’t let that socialism cross the line into autocracy. Civil liberties are abundant (consider decriminalized drugs and prostitution in the Netherlands). There are few restrictions on the flow of capital or of labor. Legatum’s scholars point out that Denmark, for example, has little job protection, but generous unemployment benefits. So business owners can keep the right number of workers, while workers can have a safety net while they muck around looking for that fulfilling job.

Of perhaps utmost importance, nearly all the nations in the top 10 are adept at fostering entrepreneurship and opportunity. Legatum’s researchers concluded that a country’s ranking in this area is the clearest proxy of its overall ranking in the index.

This means low business startup costs, lots of cellphones, plenty of secure Internet servers, a history of high R&D spending and the perception that working hard gets you ahead.

That last bit–the perception that working hard pays off–is especially vital. Consider that Denmark and Sweden rank first and second in entrepreneurship and opportunity, but only 77% of Swedes and 84% of Danes think that working hard will get them ahead. Compare that with the U.S., the No. 3 country for entrepreneurship and opportunity. Fully 9 of 10 Americans think that hard work will pay off.

Perception matters. Alan McCormick, a managing director at Legatum, points out that the U.S. remains the envy of the world when it comes to entrepreneurialism, pointing out that during the recession year of 2009, Americans created 558,000 new businesses each month. That’s 27,000 more per month than in 2008 and 60,000 more per month than in 2007.

For countries that want to move up in the prosperity rankings, that care about improving the happiness of their people, one of the best ways may be to cultivate an entrepreneurial culture.

“Over the last three decades, new startups have accounted for nearly all of the increased employment in the American private sector,” says McCormick. “Entrepreneurial societies raise levels of expectation and produce a culture in which human potential is released, healthy risk-taking is encouraged, and where the fledgling business ideas of today become the global-selling products of tomorrow.”

Entrepreneurialism also gives a society a mechanism by which it can address and improve other aspects of the prosperity ecosystem. Want better education, health care or safety? Someone’s ready to sell it to you.

So what else does the U.S. have going for it? High levels of governance, education and freedom. But most surprising, Legatum gives the U.S. the top ranking in the world when it comes to health.

Huh? Didn’t we spend last year decrying the sorry state of an American health care system that had left 40 million uninsured? This doesn’t mean the U.S. has the best health care system, says McCormick, but $5,500 a year in per-capita health spending has resulted in excellent vaccination rates, water quality and sanitation.

Lacking: the U.S. scored just 62nd in feeling “well rested.” Compare that with China, which ranked 12th in being well rested.

That takes us back to our original question: What does happiness mean to you? Does being well rested fit into the equation? Maybe. But not if all that shuteye is because you don’t have a job to go to. Or if you have no choice but to rest because you don’t have access to real medical care. China ranks 66th in health, spending just $350 per capita per year.

Overall China is the 58th most prosperous nation in the world. Despite scoring well in economic measures, it’s dragged down by a rank of 92nd in safety and security and 102nd in personal freedom (just edging out Saudi Arabia and Zimbabwe).

And the worst? Zimbabwe is the least prosperous country on Earth, followed by Pakistan, according to the study, with most of the rest of sub-Saharan Africa not much better. To be fair, some countries, like North Korea, are so far off the deep end that they don’t publish any data or let in pollsters to quiz their people.

How to improve their plight? Economic growth at all costs. Roger Bate, a fellow at the American Enterprise Institute, points out that if you live in one of the poorest nations, a doubling of income from $3,000 to $6,000 per year will generate a lot more additional happiness than would a pay raise of the same amount, from $33,000 to $36,000, for a citizen of a prosperous country.

Ultimately how happy you are depends on how happy you’ve been. If you’re already rich, like Scandinavia, then more freedom, security and health would add the most to happiness. For the likes of China and India (ranked 88th), it’s more a case of “show me the money.” What they want most of all? The opportunity to prove to themselves that money doesn’t buy happiness.